6-i

CHAPTER 6. MARKUPS FOR PRODUCT PRICE DETERMINATION 

TABLE OF CONTENTS 

6.1 INTRODUCTION ........................................................................................................... 6-1

6.2 MANUFACTURER MARKUP ...................................................................................... 6-1

6.3 DISTRIBUTION CHANNELS ....................................................................................... 6-2

6.3.1 Calculating Markups ........................................................................................................ 6-3

6.4 PORTABLE DEHUMIDIFIERS ..................................................................................... 6-3

6.4.1 Methodology for Retailer Markups ................................................................................. 6-4

6.4.2 Derivation of Retailer Markup for Portable Dehumidifiers ............................................. 6-6

6.5 MARKUPS FOR WHOLE-HOME DEHUMIDIFIERS ................................................. 6-7

6.5.1 Methodology for Wholesaler Markups ............................................................................ 6-9

6.5.2 Derivation of Wholesaler Markups ................................................................................ 6-10

6.5.3 Methodology for Contractor Markups ........................................................................... 6-11

6.5.4 Derivation of Markups for Mechanical Contractors ...................................................... 6-12

6.5.4.1 Aggregate Markups for Mechanical Contractors ......................................... 6-12

6.5.4.2 Mechanical Contractor Markups in the Replacement and First Time 

Owner Markets ............................................................................................. 6-13

6.5.5 Derivation of Markups for General Contractors ............................................................ 6-14

6.6 SALES TAXES ............................................................................................................. 6-16

6.7 OVERALL MARKUPS FOR DEHUMIDIFIERS ........................................................ 6-17

LIST OF TABLES 

Table 6.4-1 Four-Firm Concentration Ratio for Major Appliance Sales in Three Retail 

Channels ............................................................................................................... 6-6

Table 6.4-2 Data for Calculating Baseline Markup: Electronics and Appliance Stores ......... 6-6

Table 6.4-3 Data for Calculating Incremental Markup: Electronics and Appliance 

Stores.................................................................................................................... 6-7

Table 6.5-1 Wholesaler Expenses and Markups ................................................................... 6-10

Table 6.5-3 Mechanical Contractor Expenses and Markups Based on Census Data ............ 6-12

Table 6.5-4 Baseline Markup, All Mechanical Contractors .................................................. 6-13

Table 6.5-5 Baseline Markups for Replacement and First Time Owner Markets, All 

Mechanical Contractors ..................................................................................... 6-14

Table 6.5-6 Markups for the Replacement and First Time Owner Markets ......................... 6-14

Table 6.5-8 General Residential Building Contractor Expenses and Markups ..................... 6-15

Table 6.6-1 Average Sales Tax Rates by Census Division and Large State ......................... 6-16

Table 6.7-1 Summary of Markups for Portable Dehumidifiers ............................................ 6-18

Table 6.7-2 Summary of Markups for Whole-Home Dehumidifiers .................................... 6-18
6-ii

LIST OF FIGURES 

Figure 6.3.1 Distribution Channel for Portable Dehumidifiers ................................................ 6-2

Figure 6.3.2 Distribution Channels for Whole-Home Dehumidifiers ...................................... 6-3
6-1

CHAPTER 6. MARKUPS FOR PRODUCT PRICE DETERMINATION 

6.1 INTRODUCTION 

 To carry out its economic analyses of potential new energy conservation standards for 

dehumidifiers, the U.S. Department of Energy (DOE) must determine the cost to the consumer of 

both baseline products (i.e., products not subject to new energy conservation standards) and more 

efficient products. There are two types of markups: (1) baseline markups on the direct business 

costs of products having baseline efficiency (baseline products) and (2) incremental markups on 

incremental product costs of higher-efficiency products. DOE estimated consumer prices for 

baseline products by applying a baseline markup to the manufacturers’ production costs 

estimated in the engineering analysis. For products having higher-than-baseline efficiency, DOE 

estimated consumer prices by applying appropriate markups to the incremental manufacturing 

costs estimated in the engineering analysis. 

 In the rulemaking for residential dehumidifiers, DOE is considering two product types: 

portable and whole-home dehumidifiers. The markups applied to the two product types differ 

because the products generally follow different distribution channels, as discussed below. Both 

product types, however, will receive manufacturer markups, as described in section 6.3. 

DOE has identified five product classes of portable dehumidifiers, and two of wholehome dehumidifiers. In this analysis, DOE assumed that the market saturation rate for each of 

the seven dehumidifier product classes varies by the geographical regions defined in the 2009 

Residential Energy Consumption Survey (RECS 2009)

1

and based on the shipments forecasts for 

2019. Therefore, DOE calculated regional markups for each dehumidifier product class. 

6.2 MANUFACTURER MARKUP 

 A manufacturer applies a markup to transform production costs into a manufacturer 

selling price (MSP). DOE used the manufacturer’s cost of goods sold (CGS) and gross margin 

(GM), along with the following equation, to calculate the manufacturer markup (MUMFG).

M FG

M FG M FG

M FG CGS

CGS GM

M U

+

=

Where: 

MUMFG = manufacturer’s markup, 

CGSMFG = manufacturer’s cost of goods sold (or manufacturer production cost), and

GMMFG = manufacturer’s gross margin. 
6-2

 The manufacturer’s CGS plus its GM equals the manufacturer selling price (MSP). Both 

baseline products and those produced under new energy conservation standards receive the same 

manufacturer markup. 

DOE developed the average manufacturer markup for dehumidifiers by examining the 

annual U.S. Security and Exchange Commission (SEC) 10-K reports of publicly owned 

dehumidifier manufacturing companies from 2008 to 2012. DOE currently has no information on 

the financial performance of manufacturers of whole-home dehumidifier, because most of them 

are not public companies. Because DOE is unable to calculate a separate markup for wholehome units, DOE assumes that their manufacturer markup is the same as that of portable 

dehumidifiers. Thus DOE determined the manufacturer markup for all seven product classes of 

dehumidifiers to be 1.43. 

6.3 DISTRIBUTION CHANNELS 

 The final markups for determining consumer product prices depend on the type of 

distribution channels through which the products move from manufacturers to purchasers. At 

each point in the distribution channel, companies mark up the price of a product to cover their 

business costs and profit margin. In the rulemaking for residential dehumidifiers, DOE is 

considering two product types, portable and whole-home dehumidifiers. Given the differences in 

their applications, the two product types likely follow different distribution channels from 

manufacturer to end user. Data from the Association of Home Appliance Manufacturers 

(AHAM)2indicate that most portable dehumidifiers are sold through retail outlets, shown as in 

Figure 6.3.1. 

 

Figure 6.3.1 Distribution Channel for Portable Dehumidifiers 

 Because whole-home dehumidifiers usually are installed as part of the residential cooling 

and heating system, DOE assumes they follow the same distribution channel as do central air

conditioners and forced-air heating systems. There are two primary markets that determine how 

those products pass from the manufacturer to the consumer: one the replacement market and the 

other first time owners. In the distribution channel for replacements, the manufacturer generally 

sells the product to a wholesaler, who in turn sells it to a mechanical contractor, who in turn sells 

it to the consumer. The distribution channel for first time owners includes an additional step—

the general contractor, who buys the product from the mechanical contractor and installs it in the 

home for the consumer. 

Manufacturer Retailer Consumer 
6-3

 Figure 6.3.2 illustrates the two primary distribution channels for whole-home 

dehumidifiers. 

Replacement: 

First Time Owner: 

Figure 6.3.2 Distribution Channels for Whole-Home Dehumidifiers 

6.3.1 Calculating Markups 

 At each point in a distribution channel, companies mark up the price of a product to cover 

their business costs and profit margin. In financial statements, gross margin (GM) is the 

difference between the company revenue and the company cost of sales, or cost of goods sold 

(CGS). A company’s GM includes expenses associated with the distribution channel—overhead 

costs (sales, general, and administration); research and development; interest expenses; 

depreciation; taxes—and company profits. To cover costs and to contribute positively to 

company cash flow, the price of products must include a markup. Products command lower or 

higher markups depending on company expenses associated with the product and the degree of 

market competition. In formulating markups for dehumidifiers, DOE obtained data about the 

revenue, CGS, and expenses of firms that produce and sell portable or whole-home 

dehumidifiers. 

6.4 PORTABLE DEHUMIDIFIERS

Consumers generally purchase portable dehumidifiers directly from retailers. Because 

they do not have to be installed in an air-conditioning or forced-air system, portable 

dehumidifiers incur no markups associated with contractors. 

Manufacturer Wholesaler Mechanical 

Contractor

Consumer 

Wholesaler Mechanical 

Contractor 

General 

Contractor

Manufacturer Consumer
6-4

6.4.1 Methodology for Retailer Markups 

DOE based the retailer markups for portable dehumidifiers on financial data for 

electronics and appliance stores from the 2007 U.S. Census Annual Retail Trade Survey (ARTS), 

which is the most recent survey that includes industry-wide detailed operating expenses for that 

economic sector.3 DOE organized the financial data into statements that break down cost 

components incurred by firms in the sector. DOE assumes that the income statements faithfully 

represent the various average costs incurred by firms selling home appliances. Although 

electronics and appliance stores handle multiple commodity lines, the data provide the best 

available indication of expenses for selling portable dehumidifiers. 

 The baseline markup changes the MSP of baseline products to the retailer sales price. 

DOE considers baseline models to be products sold under current market conditions (i.e., without 

new energy conservation standards). DOE used the following equation to calculate an average 

baseline markup (MUBASE) for retailers. 

 

RT L

RT L RT L

BAS E CGS

CGS GM MU 



Where: 

MUBASE = retailer’s baseline markup, 

CGSRTL = retailer’s cost of goods sold (CGS), and 

GMRTL = retailer’s gross margin (GM). 

 Incremental markups are coefficients that relate the change in the MSP of higherefficiency models to the change in retailer sales price. DOE considers higher-efficiency models 

to be products sold under market conditions having new efficiency standards. The incremental 

markup reflects the retailer’s increase in a product’s CGS because of new or amended standards. 

 There is, unfortunately, a lack of empirical data regarding appliance retailer markup 

practices in response to a product’s cost increase (due to increased efficiency or other factors). 

DOE understands that real-world markup practices vary depending on the market conditions that 

retailers face and on the magnitude of the change in CGS. Pricing in retail stores also may 

involve rules of thumb that are difficult to quantify and to incorporate into DOE’s analysis. 

 Given the uncertainty about actual markup practices in appliance retailing, DOE’s 

approach reflects the following key concepts. 

 

1. Changes in the efficiency of goods sold are not expected to increase economic profits. 

Thus, DOE calculates markups/gross margins to allow cost recovery for retail companies 

in the distribution channel (including changes in the cost of capital) without changes in 

company profits. 
6-5

2. Efficiency improvements affect some distribution costs but not others. DOE sets markups 

and retail prices to cover the distribution costs expected to change with efficiency, but not 

the distribution costs that are not expected to change with efficiency. 

 The approach to incremental markups is described in more detail in Dale and Fujita.4To

estimate incremental retailer markups, DOE divides retailers’ operating expenses into two 

categories: (1) those that do not change when CGS increases because of amended efficiency 

standards (“invariant”), and (2) those that increase proportionately with CGS (“variant”). DOE 

defines invariant costs as including labor and occupancy expenses, because those costs likely 

will not increase as a result of a rise in CGS. All other expenses, as well as net profit, are 

assumed to vary in proportion to CGS. Although it is possible that some other expenses may not 

scale with CGS, DOE takes a conservative position that includes other expenses as variant costs. 

(Note: under DOE’s approach, a high fixed cost component yields a low incremental markup.) 

 DOE used the following equation to calculate the incremental markup (MUINCR) for 

retailers. 

RT L

RT L RT L

I NCR CGS

CGS VC MU 



Where: 

MUINCR = retailer’s incremental markup, 

CGSRTL = retailer’s cost of goods sold, and 

VCRTL = retailer’s variant costs. 

 In developing incremental markups, DOE envisions that retailers cover costs without 

changing profits. Although retailers may be able to reap higher profits for a time, DOE’s 

approach assumes that competition in the appliance retail market, combined with relatively 

inelastic demand (i.e., the demand is not expected to decrease significantly in response to a 

relatively small increase in price), will tend to pressure retail margins back down. 

 To measure the degree of competition in appliance retailing, DOE estimated the four-firm 

concentration ratio (FFCR) of major appliance sales in three retail channels: electronics and 

appliance stores, building materials and supplies dealers, and general merchandise stores. 

The FFCR represents the market share of the four largest firms in a given sector. Generally, an 

FFCR of less than 40 percent indicates that the sector is not concentrated; an FFCR of more than 

70 percent indicates that a sector is highly concentrated.a, b

 The FFCR of appliance sales within each retail channel is equal to the sector FFCR times 

the percent of total sales within each channel accounted for by major appliances. As shown in 

Table 6.4-1, appliance sales in electronics and appliance stores, household appliance stores, 

 

a University of Maryland University College: http://info.umuc.edu/mba/public/AMBA607/IndustryStructure.html. 

b Quick MBA: http://www.quickmba.com/econ/micro/indcon.shtml. 
6-6

building materials and supplies dealers, and general merchandise stores have a FFCR less than 

the 40-percent threshold. The electronics and appliance stores sector includes a subsector titled 

“household appliance stores.” Because that subsector includes numerous stores, it has a FFCR of 

only 21.3 percent. 

Table 6.4-1 Four-Firm Concentration Ratio for Major Appliance Sales in Three Retail 

Channels 

Sector FFCR (% of 

Sector Sales)

Percent of Sales 

Accounted for by 

Major Appliances (%)

FFCR

(% of Major 

Appliance Sales)

Electronics and appliance 

stores 46.3 42.1 19.5

Subsector: household 

appliance stores 21.3 37.1 7.9

Building materials and 

supplies dealers 45.9 17.0 7.8

General merchandise stores 73.2 31.6 23.1

Source: U.S. Economic Census. Establishment and Firm Size (Including Legal Form of Organization). 2007. 

*Note: It is assumed that major appliance sales are uniformly distributed within all firms in each sector. 

6.4.2 Derivation of Retailer Markup for Portable Dehumidifiers 

The 2007 ARTS data for electronics and appliance stores provide total sales data and 

detailed operating expenses. To construct a complete data set for estimating markups, DOE 

needed to estimate CGS and GM. The most recent 2011 ARTS publishes a separate document 

containing historical sales and gross margin from 1993 to 2011 for household appliance stores. 

DOE took the GM as a percent of sales reported for 2007 and combined that percent with 2007 

ARTS data to construct a complete income statement for electronics and appliance stores to 

estimate both baseline and incremental markups. Table 6.4-2 shows the calculation of the 

baseline retailer markup. 

Table 6.4-2 Data for Calculating Baseline Markup: Electronics and Appliance Stores 

Business Item Amount ($1,000,000)

Sales 110.673

Cost of goods sold (CGS) 81.234

Gross margin (GM) 29.439

Baseline markup = (CGS+GM)/CGS 1.36

 Source: U.S. Census, 2007 Annual Retail Trade Survey. 

 Table 6.4-3 shows the breakdown of operating expenses for electronics and appliance 

stores based on the 2007 ARTS data. The incremental markup is calculated as 1.11.
6-7

Table 6.4-3 Data for Calculating Incremental Markup: Electronics and Appliance Stores 

Business Item Amount 

($1,000,000)

Sales 110,673

Cost of goods sold (CGS) 81,234

Gross margin (GM) 29,439

Labor & Occupancy Expenses (invariant)

Annual payroll 11,714

Employer costs for fringe benefit 1,829

Contract labor costs, including temporary help 154

Purchased utilities, total 623

Cost of purchased repair and maintenance services 369

Cost of purchased professional and technical services 1,164

Purchased communication services 396

Lease and rental payments 3,576

Taxes and license fees (mostly income taxes) 619

Subtotal: 20,444

Other Operating Expenses & Profit (variant)

Expensed equipment 114

Cost of purchased packaging and containers 68

Other materials and supplies not for resale 502

Cost of purchased transportation, shipping, and warehousing services 606

Cost of purchased advertising and promotional services 2,625

Cost of purchased software 159

Cost of data processing and other purchased computer services, except 

communications + commissions paid 368

Depreciation and amortization charges 1,525

Other operating expenses 2,070

Net profit before tax (operating profit) 958

Subtotal: 8,995

Incremental markup = (CGS + Total Other Operating Expenses and 

Profit)/CGS 1.11

 Source: U.S. Census. 2007 Annual Retail Trade Survey (for sales), and 2011 Annual Retail Trade Survey (for GM 

and CGS). 

6.5 MARKUPS FOR WHOLE-HOME DEHUMIDIFIERS 

 DOE examined the manner in which wholesaler and contractor markups may change in 

response to changes in whole-home dehumidifier efficiency levels and other factors. Using the 

available data, DOE estimated that there are differences between incremental markups on 

incremental equipment costs of higher efficiency products and the baseline markup on direct 

business costs of products with baseline efficiency. Since the whole-home dehumidifiers are 
6-8

normally handled and installed by the HVAC experts, the data collected for this product are 

based on HVAC industry. 

 DOE derived the wholesaler and contractor markups from three key assumptions about 

the costs associated with whole-home dehumidifier s. DOE based the wholesaler and mechanical 

contractor markups on firm-level income statement data, and based the general contractor 

markups on U.S. Census Bureau data for the residential building construction industry. DOE 

obtained the firm income statements from the Heating, Air-conditioning & Refrigeration 

Distributors International (HARDI) 2012 Profit Report and from the Air Conditioning 

Contractors of America (ACCA) 2005 Financial Analysis.5, 6

 HARDI and ACCA are trade 

associations representing wholesalers and mechanical contractors, respectively. DOE used the 

financial data from the 2007 U.S. Census of Business for developing general contractor markups 

in the same form as the income statement data for wholesalers and mechanical contractors. The 

key assumptions used to estimate markups using these financial data are: 

1. Firm income statements faithfully represent the various average costs incurred by 

firms that distribute and install whole-home dehumidifiers. 

2. Costs can be divided into two categories: (1) costs that vary in proportion to the MSP 

of dehumidifiers (variant costs); and (2) costs that do not vary with the MSP of 

dehumidifiers (invariant costs). 

3. Overall, wholesale and contractor prices for dehumidifiers vary in proportion to the 

wholesaler and contractor costs for dehumidifiers included in the income statements. 

 In support of the first assumption, the income statements divide firm costs into various 

expense categories, including direct costs to purchase or install the product, labor and occupancy 

costs, and other operating costs and profit. Although wholesalers and contractors tend to handle 

multiple commodity lines, including room air conditioners, furnaces, central air conditioners,

heat pumps, and boilers, the HARDI and ACCA data provide the best available indication of the 

expenses associated with wholesaling or installing dehumidifiers. 

 Information obtained from the trade literature, and from selected HVAC wholesalers, 

contractors, and consultants, tends to support the second assumption; this information indicates 

that wholesale and contractor markups vary according to the quantity of labor and materials used 

to distribute and install appliances. In the following discussion, DOE assumes a division of costs 

between those that do not scale with the manufacturer price (labor and occupancy expenses) and 

those that do (operating expenses and profit). 

 In support of the third assumption, the HVAC wholesaler and contractor industry is 

competitive, and consumer demand for heating and air conditioning is inelastic; that is, demand 

does not decrease significantly in response to an increase in product price. The large number of 

HVAC firms listed in the 2007 Census indicates the competitive nature of the market. The 2007 

Census lists, for example, more than 700 HVAC manufacturers,7

5,300 wholesalers of heat 

pumps and air-conditioning equipment,8 more than 170,000 general residential contractors,9and 

91,000 HVAC contractors.10 Following standard economic theory, competitive firms facing 

inelastic demand either set prices in line with costs or quickly go out of business.11
6-9

 DOE concluded that markups for more efficient products are unlikely to be proportional 

to all direct costs. When the wholesaler’s purchase price of products increases, for example, only 

a fraction of the business expenses increases, while the rest may remain relatively constant. If the 

unit price of a dehumidifier increases by 30 percent because of improved efficiency, for example, 

it is unlikely that the cost of secretarial support in an administrative office also will increase by 

30 percent. Therefore, DOE assumed that incremental markups cover only those costs that scale 

with a change in the MSP (variant costs).

6.5.1 Methodology for Wholesaler Markups 

 Applying the assumptions described above, DOE developed baseline and incremental 

markups for wholesalers using the firm income statement from the HARDI 2012 Profit Report.

Appendix 6A.1 presents the HARDI itemized revenues and costs in full. Baseline markups cover 

all the wholesaler’s costs (both invariant and variant). DOE calculated the baseline markup for 

wholesalers using the following equation. 

WHOLE

WHOLE WHOLE WHOLE

WHOLE

WHOLE WHOLE

BASE CGS

CGS IVC VC

CGS

CGS G M

MU

 (  )







 

Where: 

MUBASE = wholesaler’s baseline markup, 

CGSWHOLE = wholesaler’s cost of goods sold, 

GMWHOLE = wholesaler’s gross margin, 

IVCWHOLE = wholesaler’s invariant costs, and 

VCWHOLE = wholesaler’s variant costs. 

 Incremental markups are coefficients that relate the change in the MSP of more energy 

efficient models, or those products that meet the requirements of new energy conservation 

standards, to the change in the wholesaler sales price. Incremental markups cover only those 

costs that scale with a change in the MSP (variant costs). DOE used the following equation to 

calculate the incremental markup (MUINCR) for wholesalers. 

W HOL E

W HOL E W HOL E

INCR CGS

CGS VC MU 



 

Where: 

MUINCR = wholesaler’s incremental markup,

CGSWHOLE = wholesaler’s cost of goods sold, and 

VCWHOLE= wholesaler’s variant costs.
6-10

6.5.2 Derivation of Wholesaler Markups 

 Wholesalers reported median data in the confidential survey that HARDI conducted of 

member firms.3

Table 6.5-1 summarizes the data as cost-per-dollar sales revenue and cost per 

dollar of goods (CGS).

Table 6.5-1 Wholesaler Expenses and Markups 

Description

Per Dollar

Sales 

Revenue ($)

Per Dollar 

Cost of 

Goods ($)

Direct cost of product sales (CGS) 0.737 1.000

Labor expenses (salaries and benefits) 0.151 0.205

Occupancy expenses (rent, maintenance, and utilities) 0.036 0.049

Other operating expenses (depreciation, advertising, and 

insurance)

0.055 0.075

Operating profit 0.021 0.028

Baseline wholesaler markup (MUWHOLE BASE) 1.357

Incremental wholesaler markup (MUWHOLE INCR) 1.103

 Source: Heating, Air Conditioning & Refrigeration Distributors International. 2012. 2012 Profit Report (2011 data).

 Based on the information in Table 6.5-1, direct product expenses (cost of goods sold) 

represent about $0.74 per dollar sales revenue, so for every $1 wholesalers take in as sales 

revenue, $0.74 is used to pay CGS. Labor expenses represent $0.15 per dollar of sales revenue; 

occupancy expenses represent $0.04; other operating expenses represent $0.06; and profit 

accounts for $0.02 per dollar sales revenue. 

 DOE converted the expenses per dollar sales into expenses per dollar CGS by dividing 

each value in the first data column by $0.74 (i.e., CGS per dollar of sales revenue). The data in 

column two show that, for every $1.00 spent on products, the wholesaler allocates $0.205 to 

cover labor costs, $0.049 to cover occupancy expenses, $0.075 for other operating expenses, and 

$0.028 in profits. A total of $1.357 in sales revenue is earned for every $1.00 spent on products. 

Therefore, the baseline wholesaler markup (MUWHOLE BASE) is 1.357 ($1.357 ÷ $1.00). 

 DOE also used the data in column two to estimate the wholesaler’s incremental markup. 

The incremental markup depends on which of the costs in Table 6.5-1 are variant and which are 

invariant with MSP. For example, for a $1.00 increase in MSP, if all the other costs scale with 

the MSP (i.e., all costs are variant), the increase in wholesale price will be $1.360, implying that 

the incremental markup is 1.360, or the same as the baseline markup. At the other extreme, if 

none of the other costs are variant, then a $1.00 increase in MSP will lead to a $1.00 increase in 

the wholesale price, for an incremental markup of 1.0. DOE believes that the labor and 

occupancy costs will be invariant and that the other operating costs and profit will scale with the 

MSP. In this case, for a $1.00 increase in MSP, the wholesale price will increase to match 

changes in "other" operating costs and operating profit of $0.076, which when divided by 73.7
6-11

cents in CGS yields an increase of $0.103, for a wholesaler incremental markup (MUWHOLE INCR) of 

1.103. 

6.5.3 Methodology for Contractor Markups 

 Financial data similar to that used to estimate markups for wholesalers also are available 

for mechanical and general contractors from the ACCA Financial Analysis2and the 2007 

Economic Census. To estimate dehumidifier markups specific to mechanical contractors, DOE 

collected financial data from the Plumbing and HVAC Contractors (NAICS 23822) series from 

the 2007 Economic Census. To estimate general contractor markups for dehumidifiers in 

residential applications, DOE collected data from the Residential Building Construction series 

from the 2007 Economic Census, which is the aggregation of New Single-Family General 

Contractors (NAICS 236115), New Multifamily Housing Construction (NAICS 236116), New 

Housing Operative Builders (NAICS 236117), and Residential Remodelers (NAICS 236118). 

ACCA financial data provide GM as a percent of sales for the mechanical contractor industry. 

Baseline markup can be derived using the following equation. 

(%) (%)

(%)

Sales G M

Sales MUBAS E





 The U.S. Census data include the number of contractor establishments, payroll for 

construction workers, value of construction, cost of materials, and cost of subcontracted work at 

both state and national levels. DOE calculated the baseline markup for mechanical and general 

contractors using the following equation. 

Pay MatCost SubCost

V

MU CONS T R UCT

B A S E





Where: 

MUBASE

= baseline markup for mechanical contractor or general contractor, 

VCONSTRUCT

= value of construction, 

Pay

= payroll for construction workers, 

MatCost

= cost of materials, and 

SubCost

= cost of subcontracted work. 

 Analogously, DOE estimated the incremental mechanical and general contractor markups 

by marking up only those variant costs that scale with a change in the MSP for more energy 

efficient products. DOE categorized the Census cost data in each major category and used the 

following equation to estimate markups.

CONT

CONT CONT

INCR CGS

CGS VC MU 



 
6-12

Where: 

MUINCR = contractor’s incremental markup, 

CGSCONT = contractor’s cost of goods sold, and 

VCCONT= contractor’s variant costs. 

6.5.4 Derivation of Markups for Mechanical Contractors 

 This section describes markups for whole-home dehumidifiers applied by the mechanical 

contractor. After first presenting aggregate markups, this section divides those markups into 

categories of replacement and first time owner market.

6.5.4.1 Aggregate Markups for Mechanical Contractors 

 The 2007 Economic Census provides a Geographic Area series for the Plumbing and 

HVAC Contractors (NAICS 23822) sector, which contains national average sales and cost data,

including value of construction, cost of subcontract work, cost of materials, and payroll for 

construction workers. It also provides the cost breakdown of GM, including labor expenses, 

occupancy expenses, other operating expenses, and profit. The gross margin provided by the 

U.S. Census is disaggregated enough that DOE was able to determine the invariant and variant 

costs for the sector. By using the equations presented above, DOE estimated baseline and 

incremental markups, as shown in Table 6.5-2. (Appendix 6A.2 contains the full set of data.) 

Table 6.5-2 Mechanical Contractor Expenses and Markups Based on Census Data

Description

Mechanical Contractor 

Expenses and Revenue

Per Dollar

Sales 

Revenue ($)

Per Dollar 

Cost of 

Goods ($)

Direct cost of products (CGS) 0.68 1.00

Labor expenses (salaries [indirect] and benefits) 0.18 0.26

Occupancy expenses (rent, maintenance, and utilities) 0.02 0.03

Other operating expenses (depreciation, advertising, and 

insurance)

0.08 0.12

Net profit before taxes 0.04 0.06

Baseline markup (MUMECH BASE): revenue per $ CGS 1.48

Incremental markup (MUMECH INCR): increased revenue per $ increase 

in CGS

1.18

 Source: U.S. Census Bureau. 2007. Plumbing, Heating, and Air-Conditioning Contractors. Sector 23: 238220. Construction: 

Industry series, Preliminary Detailed Statistics for Establishments. 2007. 

 

 The first data column in Table 6.5-2 provides the CGS and a list of GM components as 

expenses per dollar of sales revenue. As shown in the table, the direct cost of sales represents 

about $0.68 per dollar sales revenue to the mechanical contractor, and the gross margin totals 
6-13

$0.32 per dollar sales revenue. DOE converted those expenses per dollar sales into revenue per 

dollar CGS by dividing each figure in the first data column by $0.68. For every $1.00 spent on 

products, the mechanical contractor earns $1.00 in sales revenue to cover the product cost and 

$0.48 to cover other costs. The $1.48 in sales revenue earned for every $1.00 spent on product 

costs is equivalent to a baseline markup (MUMECH CONT BASE) of 1.48 for mechanical contractors. 

 DOE used the data in column two of Table 6.5-2 to estimate incremental markups, after 

classifying the costs as either invariant or variant. At one extreme, if all of the other costs scale 

with the product cost (i.e., all costs are variant), the increase in mechanical contractor cost will 

be $1.48, implying that the incremental markup is 1.48, or the same as the baseline markup. At 

the other extreme, if none of the other costs are variant, then a $1.00 increase in product price 

will lead to a $1.00 increase in the mechanical contractor price, for an incremental markup of 

1.0. DOE believes the labor and occupancy costs are invariant and the other operating costs and 

profit are variant. In that case, for a $1.00 increase in product cost, the mechanical contractor’s 

price will increase by $1.18, for an incremental markup (MUMECH CONT INCR) of 1.18.

6.5.4.2 Mechanical Contractor Markups in the Replacement and First Time 

Owner Markets 

 DOE derived the baseline and incremental markups for both replacement and new 

construction markets using the 2007 Economic Census industrial cost data12 supplemented with 

the ACCA 2005 financial data.5The 2007 Economic Census provides a sufficiently detailed cost 

breakdown for the Plumbing and HVAC Contractors (NAICS 23822) sector to enable DOE to 

estimate baseline and incremental markups for mechanical contractors. The 2007 Economic 

Census does not separate the mechanical contractor market into replacement and first time owner 

markets, however. In order to calculate markups for the two markets, DOE utilized 2005 ACCA 

financial data, which reports GM data for the entire mechanical contractor market and for both 

the replacement and first time owner markets. 

 HVAC contractors, defined here as mechanical contractors, reported median cost data in 

the ACCA’s 2005 financial analysis of the HVAC industry. Those data are shown in Table 6.5-3. 

Table 6.5-3 Baseline Markup, All Mechanical Contractors 

Description

Contractor Expenses or 

Revenue

Per Dollar

Sales Revenue

($)

Per Dollar 

Cost of Goods

($)

Direct cost of product sales (CGS) 0.73 1.00

Gross margin (labor, occupancy, operating expenses, 

and profit)

0.27 0.37

Revenue (baseline revenue earned per $ CGS) 1.37

Baseline markup (MUMECH CONT BASE) 1.37

 Source: Air Conditioning Contractors of America. 2005. Financial Analysis for the HVACR Contracting Industry. 
6-14

 Table 6.5-4 summarizes the GM and resulting baseline markup data for all mechanical 

contractors who serve the replacement and first time owner markets. 

Table 6.5-4 Baseline Markups for Replacement and First Time Owner Markets, All 

Mechanical Contractors 

Description

Contractor Expenses or Revenue by Market Type

Replacement First Time Owners

Per Dollar

Sales 

Revenue

($)

Per Dollar 

Cost of 

Goods

($)

Per Dollar

Sales 

Revenue

($)

Per Dollar 

Cost of 

Goods

($)

Direct cost of product sales 

(CGS) 0.703 1.000 0.745 1.000

Gross margin (labor, occupancy, 

operating expenses, and profit)

0.297 0.422 0.255 0.342

Baseline markup (MUMECH 

CONT BASE), revenue per $

CGS

NA 1.42 NA 1.34

Difference compared to

aggregate baseline markup (%) NA 3.6 NA -2.2

 Source: Air Conditioning Contractors of America (ACCA). 2005. Financial Analysis for the HVACR Contracting Industry. 

Using the baseline markup data from Table 6.5-4 and data from Table 6.5-3, DOE 

calculated that mechanical contractors’ baseline markups for the replacement and first time 

owner markets for dehumidifiers are 3.6 percent higher and 2.2 percent lower, respectively, than 

for mechanical contractors serving all markets. DOE applied those markup deviations derived for 

all mechanical contractors to the baseline markup of 1.48 and the incremental markup of 1.18 

estimated in Table 6.5-2. DOE assumed that the deviations apply equally to the baseline and 

incremental markups calculated from the 2007 Economic Census. The baseline and incremental 

markups for the replacement and first time owner markets served by mechanical contractors are 

shown in Table 6.5-5. 

Table 6.5-5 Markups for the Replacement and First Time Owner Markets 

Market Sector Baseline Markup Incremental Markup

Replacement market 1.53 1.22

First time owner market 1.45 1.15

6.5.5 Derivation of Markups for General Contractors 

 DOE derived markups for general contractors from U.S. Census Bureau data for the 

residential construction sector.13 The residential construction sector includes establishments 

engaged primarily in construction work, including new construction, additions, alterations, and 

repairs of residential buildings. The U.S. Census data for the construction sector include detailed 

statistics for establishments that have payrolls, similar to the data reported by HARDI for 

wholesalers. The primary difference is that the U.S. Census Bureau reports itemized revenues 
6-15

and expenses for the construction industry as a whole in total dollars rather than in typical values 

for an average or representative business. Because of this difference, DOE assumed that the total 

dollar values reported by the U.S. Census, once converted to a percentage basis, represent 

revenues and expenses for an average or typical general contracting business. The first data 

column in Table 6.5-6 summarizes the expenses for general contractors in residential building 

construction as expenses per dollar sales revenue. (Table 6-A.3 in appendix 6A.3 contains the 

full set of data.) 

Table 6.5-6 General Residential Building Contractor Expenses and Markups

Description

General Contractor Expenses 

or Revenue

Per Dollar

Sales Revenue

($)

Per Dollar 

Cost of Goods

($)

Direct cost of product sales (CGS) 0.68 1.00

Labor expenses (salaries [indirect] and benefits) 0.08 0.12

Occupancy expenses (rent, maintenance, and utilities) 0.01 0.01

Other operating expenses (depreciation, advertising, and 

insurance)

0.06 0.09

Net profit before taxes 0.17 0.25

Baseline markup (MUGEN CONT BASE), revenue per dollar cost of 

goods

1.47

Incremental markup (MUGEN CONT INCR), increased revenue per dollar 

increase in CGS

1.34

 Source: U.S. Census Bureau. 2007. Residential Building Construction. Sector 23: 236115-236118. Construction: Industry

series: Preliminary Detailed Statistics for Establishments: 2007. 

 As shown in the first data column, the direct cost of sales represents about $0.68 per 

dollar sales revenue to the general contractor. Labor expenses represent $0.08 per dollar sales 

revenue; occupancy expenses represent $0.01 per dollar sales revenue; other operating expenses 

represent $0.03; and profit makes up $0.20 per dollar sales revenue. 

 DOE converted the expenses per dollar sales into revenue per dollar CGS by dividing 

each value in the first data column by $0.68. The data in column two show that, for every $1.00 

spent on product costs, the general contractor earns $1.00 in sales revenue to cover the product 

cost, $0.12 to cover labor costs, $0.01 to cover occupancy expenses, $0.09 for other operating 

expenses, and $0.25 in profits. A total of $1.47 in sales revenue is earned for every $1.00 spent 

on product costs of a baseline markup (MUGEN CONT BASE) of 1.47. 

 DOE used the data in column two of Table 6.5-6 to estimate incremental markups, after 

classifying the costs as either invariant or variant. At one extreme, if all of the other costs are 

variant, the increase in general contractor price would be $1.47, implying that the incremental 

markup is 1.48, or the same as the baseline markup. At the other extreme, if none of the other 

costs are variant, then a $1.00 increase in product cost leads to a $1.00 increase in the general 

contractor price, for an incremental markup of 1.0. DOE believes the labor and occupancy costs 
6-16

are invariant and the other operating costs and profit are variant. In this case, for a $1.00 increase 

in product cost, the general contractor’s price would increase by $1.34, giving the general 

contractor an incremental markup (MUGEN CONT INCR) of 1.34. 

6.6 SALES TAXES 

 The sales tax comprises state and local taxes applied to the price a consumer pays for a 

product. The sales tax is a multiplicative factor that increases the consumer product price. DOE 

applied sales tax to the retail price of portable dehumidifiers and consumer price of whole-home 

dehumidifiers in the replacement market, not the first time owner market. The common practice 

for selling larger appliances such as whole-home dehumidifiers in the first time owner market is 

that general contractors (or builders) bear the added sales tax for the appliances, in addition to 

the cost of the units. Therefore, no specific sales tax is necessary to calculate the consumer 

product price for the first time owner market. 

 DOE derived state and local taxes from data provided by the Sales Tax Clearinghouse.14

The data represent weighted averages that include county and city rates. DOE then derived 

population-weighted average tax values for each RECS region, as shown in Table 6.6-1.

Table 6.6-1 Average Sales Tax Rates by Census Division and Large State 

RECS 

Region State(s) Population 2013 Tax 

Rate (%)

1 Connecticut, Maine, New Hampshire, Rhode Island, 

Vermont 7,904,824 5.13

2 Massachusetts 6,587,536 6.25

3 New York 19,465,197 8.40

4 New Jersey 8,821,155 6.95

5 Pennsylvania 12,742,886 6.40

6 Illinois 12,869,257 8.05

7 Indiana, Ohio 18,061,873 6.87

8 Michigan 9,876,187 6.00

9 Wisconsin 5,711,767 5.45

10 Iowa, Minnesota, North Dakota, South Dakota 9,915,184 6.86

11 Kansas, Nebraska 4,713,879 7.13

12 Missouri 6,010,688 7.20

13 Virginia 8,096,604 5.60

14 Delaware, District of Columbia, Maryland, West Virginia 8,919,645 5.59

15 Georgia 9,815,210 7.10

16 North Carolina, South Carolina 14,335,631 7.00

17 Florida 19,057,542 6.65

18 Alabama, Kentucky, Mississippi 12,150,608 7.25

19 Tennessee 6,403,353 9.45
6-17

RECS 

Region State(s) Population 2013 Tax 

Rate (%)

20 Arkansas, Louisiana, Oklahoma 11,304,323 8.67

21 Texas 25,674,681 7.95

22 Colorado 5,116,796 6.10

23 Idaho, Montana, Utah, Wyoming 5,968,564 5.29

24 Arizona 6,482,505 7.20

25 Nevada, New Mexico 4,805,546 7.31

26 California 37,691,912 8.45

27 Oregon, Washington, Alaska, Hawaii 12,799,425 5.30

Population-weighted average 7.146

6.7 OVERALL MARKUPS FOR DEHUMIDIFIERS 

 The overall markup for each distribution channel is the product of the appropriate 

markups, as well as the sales tax in the case of direct consumer purchases of portable 

dehumidifiers and replacement market of whole-home dehumidifiers. 

 DOE used the overall baseline markup to estimate the consumer product price of baseline 

models, given the manufacturer cost of baseline models. As stated previously, DOE considers 

baseline models to be products sold under current market conditions (i.e., without new energy 

conservation standards). The following equation shows how DOE used the overall baseline 

markup to determine the product price for baseline models. 

  CPPBASE COSTMFG MFG MUMU BASE TaxSALES COSTMFG MUOVERALL _BASE

Where: 

CPPBASE = consumer product price for baseline model,

COSTMFG = manufacturer’s cost for baseline model, 

MUMFG = manufacturer’s markup, 

MUBASE = baseline markup for portable dehumidifiers and whole-home 

dehumidifiers (replacement and new home markets), 

TaxSALES = sales tax (portable dehumidifiers and replacement market of whole-home 

dehumidifiers), and 

MUOVERALL_BASE = overall baseline markup. 

 Similarly, DOE used the overall incremental markup to estimate changes in the consumer 

product price given changes in the manufacturer cost resulting from an energy conservation 

standard. The total consumer product price for more energy efficient models comprises two 

components: the consumer product price of the baseline model, and the change in consumer 

product price associated with the increase in manufacturer cost to meet the new energy 

conservation standard. The following equation shows how DOE used the overall incremental 

markup to determine the consumer product price for more energy efficient models. 
6-18

 

BASE MFG OVERALL INCR

STD MFG OVERALL BASE MFG MFG INCR SALES

CPP COST MU

CPP COST MU COST MU MU Tax

_

_



 

Where: 

CPPSTD = consumer product price for models that meet new energy conservation 

standards, 

CPPBASE = consumer product price for baseline model, 

COSTMFG = manufacturer’s cost for baseline model, 

ΔCOSTMFG = change in manufacturer’s cost for more energy efficient models, 

MUMFG = manufacturer’s markup, 

MUINCR = incremental markup for portable dehumidifier and whole-home 

dehumidifiers (replacement and new home markets), 

TaxSALES = sales tax (portable dehumidifiers and replacement market of whole-home 

dehumidifiers), and 

MUOVERALL_BASE = overall baseline markup (product of manufacturer markup, and 

MUOVERALL_INCR = overall incremental markup. 

 National average baseline and incremental markups for both portable and whole-home 

dehumidifiers are summarized in Table 6.7-1 and Table 6.7-2, respectively.

Table 6.7-1 Summary of Markups for Portable Dehumidifiers 

Markup Baseline Incremental

Manufacturer 1.43

Retailer 1.36 1.11

Sales tax 1.071

Overall 2.08 1.70

Table 6.7-2 Summary of Markups for Whole-Home Dehumidifiers 

Markup

Replacement First Time Owner

Baseline Incremental Baseline Incremental

Manufacturer 1.43 1.43

Wholesaler 1.36 1.10 1.36 1.10

Mechanical contractor 1.53 1.22 1.45 1.15

General contractor -- -- 1.47 1.34

Sales tax 1.071 -- --

Overall 3.19 2.06 4.15 2.42
6-19

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1. U.S. Department of Energy: Energy Information Administration, Residential Energy 

Consumption Survey: 2009 RECS Survey Data, 2013. (Last accessed March, 2013.) 

<http://www.eia.gov/consumption/residential/data/2009/>

2. Association of Home Appliance Manufacturers, AHAM 2009 Fact Book. 2009. 

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Stores. 2007: Washington, DC. http://www.census.gov/retail/arts/historic_releases.html

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Establishments: 2007. 2007<http://www.census.gov/econ/> 

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238220. Construction: Industry Series, Preliminary Detailed Statistics for 

Establishments, 2007, 2007. <http://www.census.gov/econ/>
6-20

13. U.S. Census Bureau, Construction: Industry Series: Preliminary Detailed Statistics for 

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Housing Construction (Except Operative Builders), New Housing Operative Builders, 

and Residential Remodelers, 2007. <http://www.census.gov/econ/>

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<http://thestc.com/STrates.stm>